Why Doing Taxes Is So Hard In The U.S.
Tax season is here, and if you aren't rich enough to avoid worrying about it, you probably have a few questions about filing — here's what you should know.
The guy from the 100 dollar bill famously said, “In this world, nothing is certain except death and taxes.” So far, he’s been mostly right. People have for sure died and nearly everyone, outside of some of the biggest corporations and wealthiest people, have managed to do their taxes with help from some user-friendly tax software or a professional, uh, tax…person.
So what’s the best route to take? Should you become rich enough to staff a team of experts to look for loopholes, should you just hire a professional or should you do them yourself?
We spoke to former-model-turned-into-tax-expert Duke Alexander Moore (@dukelovestaxes). He explained how we got over 70,000 pages long tax code, hottest tax credit for 2021 (Child and Dependent Care Credit), what the hell is Payment Settlement Entity, and answers the question everyone is asking: Should you hire a CPA?
How we got over 70,000 pages long tax code
Moore: “…The tax code itself can be very complicated. I mean, it's like over 70,000 pages long, they're always changing it, they're always adding new things. It's just something you're not constantly updating yourself with. It's complicated, intimidating…”
70,000 pages long. That’s 16 times longer than the world’s longest novel ever written by Marcel Proust. And the tax ‘book’ grows larger every year, it’s a ‘book’ that disproportionately benefits the wealthy because the current system is designed to work for the few at the expense of the many.
Moore: “...You have people with a lot of money and a lot of power who are saying, make this hard so people can use our products and services, and it just makes things very difficult. That's why taxes are very hard to understand.”
Of course, this disaster is confined to America. In parts of Europe, as ProPublica notes, “You sit down, review a prefilled filing from the government. If it’s accurate, you sign it. If it’s not, you fix it or ignore it altogether and prepare your return yourself.”
But because tax software companies spend millions of dollars every year lobbying the US government to keep taxes absolutely insane and complicated, many Americans are forced to use their software and give them money so they can continue the vicious cycle next season.
Moore: “And then it's a for profit organization. Taxes is a requirement. So let's make something required difficult so they can use our stuff. You create a problem, we have the solution. Come here. About $50, but come here. It's just the way it is. It's sad, but it is what it is.”
Hottest tax credit for 2021 (Child and Dependent Care Credit)
While the current system is far from ideal, you can make the best of it. There are a few new things to look out for this season to recoup costs.
Moore: “Let's talk about the hottest tax credits for 2021. What's going down right now. One of them definitely is what's called the Child and Dependent Care Credit. This is a tax credit where parents can see up to an $8,000 increase in their refunds this year. This is for the first time in history the Child and Dependent Care Credit has ever been refundable where you can increase refunds. In the past it just helped you to pay less taxes. This is the first time ever that this is refundable. Pretty much how it works is if you have you're going to get 50% back of the child care that you paid someone to watch your kid while you worked, looked for work, or a full time student, you paid for someone to watch your kid while you worked, looked for work, or a full time student. Now, for one kid the maximum amount you can claim is $8,000. That's the maximum amount of expenses you can claim for one kid, $8,000. You get all this 50% back. So if you have one kid you can see up to a $4,000 increase in your refund this year. If you have two or more kids the maximum amount of expense you can claim is $16,000. This means that you could see up to and $8,000 increase in your refund this year. Parents, if you pay for someone to watch your kids while you work, look for work, or are a full time student I don't want you to miss out on this credit. It's super important.”
What the hell is Payment Settlement Entity
And one brand new thing happening this year, in 2022 is—
Moore: “if you use what's called a payment settlement entity, so these are things like cash apps, these are things like PayPal, these are things like Venmo, if you use any of those transactions and on those payment settlement entities and you receive more than $600 you may be subject to what's called a 10-99K. This is if you're receiving those $600 in exchange for goods or services. Where people are freaking out, and where I don't want you to freak out, is this is only subject to those who are business owners or who are using a business account on this platform. This is not for the everyday person who's like hey Grandma, can you give me $600 because it's my birthday? And Grandma gives you $600 for your birthday. No, you're not going to pay taxes on that…You're good. I got you, you're good. Everything is fine.”
So if you’re worried about that rent your roommate venmo’d you, don’t be. If you’re worried about that rent your roommate didn’t venmo you, uh, that’s valid. But if you hung someone’s television and they venmo’d you more than $600, first of all, great job getting away with robbery, but second of all, you’re going to want to look into paying taxes on that.
Should you hire a CPA (Certified Public Accountant)?
So, with all these new rules making taxes more difficult each year, should you hire a CPA or do your taxes yourself? If you’re—
Moore: “If you're starting a small business your taxes are going to be a little bit different than they were in the past when you were just using a W-2. If you are a real estate investor, you have several real estate properties, that could be a good indication that you need a tax professional.”
Moore: “As far as other tax preparation software like Turbo Tax, TaxAct, H&R Block, I think they are great if you are a very simple tax payer. If you just have a couple of W-2s, you're claiming a couple of dependents, I think they're a phenomenal thing for people to get their tax refunds, to get their money that they're owed. That way they can do it all on their own. They're not paying anybody. I think it's a great software if you have a very very simple situation.”
So should you hire a professional? It depends. I know, I’m sorry about that answer. But typically, if your return is super complex and it has you sweating, you should probably seek professional help, uh, for the taxes. The source of the sweat might be coming from the fact that you’re self-employed, or you recently got married or bought a house or moved to a different state. But if your return doesn’t have you sweating too much—a couple of W-2s or 1099, you might actually save money by using one of those online preparers. You could also consider becoming wildly rich to the point of keeping people on staff to look for loopholes in the 70,000-page tax book.
Regardless of the route you take, make sure to take deep breaths and remind yourself that it will all be over soon. So good luck out there, and hopefully you’ll get a big return. And if not, maybe the code will be in your favor next time.
Common Cents is a finance show that answers everything schools didn't. Watch more episodes of Common Cents.